President Obama and congressional Democrats could have pursued sensible policies that promote growth and fairness. They didn't. And now voters stand ready to support the Republicans' pro-growth agenda in midterm elections next week.

ByPatrick FleenorOctober 28, 2010

Alexandria, Va. — As congressional Democrats brace for an electoral shellacking next week, one question still seems to puzzle pundits: “Why didn’t President Obama do more to help the economy?” The short answer is that his goal has always been to redistribute the economic pie – not necessarily grow it. That’s a shame, because he could have pursued policies that achieve both.

“[W]hat people really want is fairness” Mr. Obama stated during the campaign. “They want people paying their fair share of taxes. They want that money allocated fairly.” After his victory, despite the economic crisis, he eschewed the Clinton mantra of “it’s the economy, stupid” and set out to make America more equitable.

Voters want economic growth

Voters, it turns out, are much more concerned about ensuring the economy grows than who gets what – especially during a deep recession. Unfortunately, the president seems locked into the mindset that greater equality of income must come at the expense of economic growth.

Take the administration’s signature achievement: enactment of healthcare reform, aka Obamacare. This legislation subsidizes health insurance for low- and middle-income groups with taxes on high-earners, leveling material wealth but dampening economic growth by encouraging everyone to pare back on their work effort.

High-income workers have an incentive to work less since they get to keep less of what they earn. Low- and moderate-income workers face the same incentive because they can now maintain the same standard of living with even less effort.

Do high tax rates really harm the economy? Consider the countries of the European Union. Since the end of the Second World War, these nations have offered their citizens generous social benefits such as government provided health care and mandated lengthy vacations. Today per capita purchasing power in the EU is just two-thirds that of the US. More-equal slices maybe, but from a much smaller pie.

To deflect criticism that his policies are harming the economy, the president has tried to rely on his formidable rhetorical skills: expanding health care coverage was going to somehow drive down costs, handouts to state and local governments became a stimulus package, climate change legislation became a “green jobs” bill, and so on. Voters, it seems, aren’t buying any of it.

Policies that achieve growth and fairness

This didn’t have to happen. Obama could have embraced many policies that would have enhanced both equity and economic performance. And some of them could have bridged the ideological divide.

An obvious candidate would have been to tackle one of the biggest factors that contributed to the financial crisis in the first place: massive federal subsidies to the real estate industry via Fannie Mae and Freddie Mac. The implicit loan guarantees provided by Fannie and Freddie prior to the bust shifted risk from participants in real estate transactions to taxpayers and allowed capital to flow into the industry under very favorable terms.

This allowed Realtors, homebuilders, developers, mortgage lenders, securities traders, and others to reap enormous gains during the boom, only to dump their losses on taxpayers during the bust. It was a classic case of private gains, socialized losses. Eliminating these loan guaranteees – indeed, cutting all federal support for Fannie and Freddie – would not only have greatly enhanced equity, it would also have helped steer investment away from ever more conspicuous McMansions and into productive endeavors like building newer, more-efficient factories, stimulating economic growth.

Another area ripe for reform would have been the loophole-ridden tax code. Today the proliferation of carve-outs means that only 40 percent of personal income is taxed, pushing rates to more than twice what they could be and creating the situation where similarly situated families often face vastly different tax burdens depending on their ability to game the system. It also means that investment is steered away from companies adept at building better products and into those with the knack for lobbying.

By closing loopholes and broadening the tax base, the president could have slashed rates, enhanced equity, and provided a huge stimulus to the economy. Instead, he’s done the opposite, adding even more loopholes and promising to raise rates.

Obama and Democrats will probably pay a high price next week for failing to see a pro-growth path to fairness. Will the presence of a Republican-led, pro-growth Congress persuade the president to pursue his goal of greater fairness in a way that helps economic growth? Our mutual prosperity depends on it.